Last week’s economic reports showed increases in retail sales and industrial production and Wednesday’s release of the Fed’s Beige Book also displayed further improvement in the economy. In addition to the positive data, Fed Chairman Ben Bernanke reiterated to Congress that the jobless recovery and low inflation environment would keep interest rates low for “an extended period.”
A more likely impediment to the rally would be if first quarter earnings season is disappointing. Current consensus estimates project the S&P 500 index earnings to increase 37% on a year-over-year basis, according to Thomson Reuters. So far earnings look on track but I would look for stocks to test their 50 day moving averages in the near-term.
It will be a particularly important week for the financials. Given the consensus projections for the sector to experience a 205% annual increase in profits, the market may become choppy if earnings come in below the bar set by JP Morgan.
Citi reported that one of their proprietary models encompassing nine factors including consumer related data such as interest rates, oil prices, housing trends as well as other influences like the trade weighted dollar and inventory/sales ratios show a very high degree of correlation to the relative performance of the Retailing industry group. The approach which has been back-tested over 20 years argues that retail stocks should underperform in the next 12 months.
If you have to be in fixed income right now then I defer to my friends at Wells. They continue to recommend diversification across sectors and credits and to be slightly short of duration targets. In the taxable markets, their Fixed-Income Strategy team carries a bias toward the senior debt of investment-grade corporate bonds. With tax-exempt issues they continue to overweight municipal securities. Specifically, they advise clients to focus on single-A rated or higher essential revenue and general obligation bonds.
I continue to favor Large Cap stocks. I especially like the financials, energy, REITs and some select materials and industrials. Here are some stocks I am looking at right now…KEY, HBAN, C, JNS, HAL, COP, APA, PLD, DDR, WY, ACI, DD, GE, TXT, JEC, and DHR.
My 3 favorite speculative positions are MGI, UNG and ETFC.
Hopefully the market continues to roll higher. However, I am hoping for more volatility. More volatility brings better option premiums and higher rcn yields. Stay tuned for more on that later.